Following the lead of investing legends like Warren Buffett isn't a bad strategy as long as you just use the information to narrow down your stock choices and do your own due diligence. Blindly following any investment advice, even from the Oracle of Omaha, is a prescription for disaster.
Although Buffett has generated average annual returns of 20% since 1965, or almost double those of the S&P 500, his more recent performance has been well below those historical averages, or only about 8% a year over the past five years.
Even so, Barron's recently said Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) could lose 99% of its current value and still outperform the broad market index over the past five-plus decades. Investors should still use caution.
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The time between when Buffett buys or sells any particular stock and when he reports the trade could be substantial. Securities regulators extend special market privileges to him and other billionaires that are unavailable to smaller investors, such as not reporting trades in a timely manner so they can be sure to get the best price.
He also doesn't always practice what he preaches. Buffett famously derided derivatives as "weapons of financial mass destruction" but invested in them anyway, and he cautioned in the past against ever investing in airlines or railroads but bought stock in both himself.
Buffett hasn't had the same reservations about oil stocks, though, and that's why you should take a closer look at where he has been spending his money in that industry.
A gusher of opportunity
Berkshire Hathaway has been buying Occidental Petroleum (OXY 0.89%) hand over fist this year, and Buffett received Federal Energy Regulatory Commission permission to buy as much as half of the oil giant's outstanding shares. That's caused a lot of investors to pile into the stock, and the shares are up 156% year to date as a result.
Yet Buffett began buying oil in 2020, notably picking up a large tranche of Chevron (CVX 1.54%) stock and then adding to his holdings earlier this year. So while the Occidental purchases rightly garnered a lot of attention, what's often not realized is that he owns even more of Chevron, which is actually the fourth-largest holding in Berkshire's portfolio, representing 8.9% of the total (Occidental accounts for 4.2% of the Berkshire's holdings).
Why does Buffett like oil so much, and Chevron in particular? It's certainly more than just the war in Ukraine and the sanctions against Russia or the decision by OPEC to cut production driving up prices. These seem far too transitory to influence an investor famous for his long-term buy-and-hold investing philosophy. In part, it likely has to do with the very long tail that exists for fossil fuel usage.
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Environmental concerns
It's doubtful that alternative energy sources like solar and wind will be the primary means for meeting energy demand in the near future, and to my thinking, the far future too. Solar and wind are far too unreliable and highly dependent on favorable weather patterns while also not being as environmentally friendly as many suppose.
They need precious natural resources that can only be mined, damage the very environment they supposedly save, and rely upon fossil fuel-driven vehicles to extract them. Such minerals are also often subject to geopolitical pressure and human rights violations.
While there is an environmental cost to oil drilling, whether on land or at sea, there are also steady improvements in carbon capture technologies that diminish the harmful impacts fossil fuels create.
A cleaner energy
Chevron is one of the largest integrated oil and gas companies in the world. Yet its Permian Basin wells, some 2.2 million net acres, are 100% powered by the natural gas it extracts so that it reduces emissions intensity and lowers its own costs, while 99% of the water used is either brackish or recycled.
The energy company notes it is spending about $2 billion through 2028 on decarbonization projects, with 36 begun in 2021 and as many as 75 begun this year. It hopes to have net zero greenhouse gas emissions by 2050, reduce its methane emissions intensity by more than 50% from 2016 levels by 2028, and eliminate routine flaring altogether by 2030.
And it's not just Chevron that's working to achieve similar goals, but also Occidental, ExxonMobil, and the entire fossil fuel industry. Today's oil and gas companies are not the same as a generation ago. Yet, as positive as that is, Buffett is likely just as interested (if not more so) in how it returns capital to shareholders.
A shareholder-friendly opportunity
In the third quarter, Chevron repurchased $3.75 billion worth of stock, or more than 1% of its total shares outstanding, while also paying $2.7 billion in dividends to shareholders. Year to date, the oil stock has bought back $7.5 billion worth of stock and paid out $8.3 billion in dividends. Chevron has also raised its payout for 35 consecutive years, making it a Dividend Aristocrat.
While profits are up threefold from last year, Chevron is up "only" 59% in 2022, and it's still trading at 11 times trailing earnings and 10 times next year's estimates. It also goes for 14 times the free cash flow it produces, so even though Buffett has owned shares for a while now, this oil giant is a good deal investors can get in on.
